Facebook no longer has to explain when it's rolling out its Novi cryptocurrency wallet. But the limited test it started Tuesday raises more questions than it answers.
The pilot of the wallet, available as an app in most of the U.S. and Guatemala, is meant to test core features of the product, as well as customer care and compliance, Facebook's David Marcus said in a tweet.
That's clear enough. Facebook's larger payments and crypto strategy remains opaque — especially because Diem, the stablecoin that stirred up so much controversy when Facebook first proposed it two years ago, isn't part of the pilot.
How Novi works
People with the Novi wallet can convert dollars or other fiat currency into USDP stablecoins, send those to other wallets, take money back out of the wallet in local currencies and even withdraw cash at certain locations or transfer it to a bank account, depending on where the user lives. The plan is for the Novi wallet to interoperate with other digital wallets.
The USDP stablecoin is issued by Paxos Trust Company, which is backed 1-to-1 by U.S. dollars, and regulated by the New York State Department of Financial Services. Coinbase is providing custody for storage of customers' funds.
This initial version of the Novi wallet has a limited but not insignificant market: people sending remittances between Guatemala and the U.S. Marcus noted that remittances make up 14% of Guatemala's GDP, the vast majority of which is from the U.S. The World Bank estimates that the average remittance cost out of the U.S. in 2020 was 5.1%.
Novi won't be available in Alaska, Nevada, New York or the U.S. Virgin Islands. It wasn't clear what regulatory hurdles remained in those territories.
Novi offers customer service via chat in Spanish and English. Facebook said it is "encrypting sensitive financial information" and has "built-in protections against fraud."
One differentiator may be Novi's ability to undo transactions, which is different from how cryptocurrency transactions typically work. Coinbase, for example, says that transactions can't be "cancelled or altered" once they're initiated. It's unclear if the money in question would be sent back for unauthorized transactions or if Facebook is in some way covering the cost of undoing transactions.
Facebook isn't the first to conceive of reversible crypto transactions. Crypto firm Kirbo has a crypto "undo button" for several tokens including its own kiro token.
In traditional payments, chargeback and fraud costs are part of what's paid for by the interchange fees charged to merchants.
Facebook's wallet is designed for payments, with merchants paying lower-than-usual fees to accept Novi. As with traditional credit and debit cards, those fees fund the payments system.
"On the Novi side, it's basically to create the best possible digital wallet that will enable anyone, no matter where you are, to have access to the financial system and move money around for free," Marcus previously told Protocol's David Pierce.
But building out a payments network, as Marcus knows from his PayPal days, is not simple. It has to convince merchants, which have a wide range of options for payments processing, to use Novi.
Facebook plans to monetize Novi by providing "merchant services" with "low rates for merchants to accept payments," Marcus told David Pierce, noting that merchants pay high rates in the U.S. Facebook's plan is to offer cheaper rates, undercutting other providers. It's unclear how Facebook will manage fraud and customer service costs while keeping its fees cheaper.
If it expands Novi beyond the current limited pilot, Facebook could push its massive user base of Facebook, Instagram and WhatsApp users to try out Novi. But Facebook has a problem: It has long offered payments and free money-transfer services within Messenger, which Marcus previously ran. Those services have a not insignificant number of users. But they lack the cultural cachet of apps like PayPal's Venmo. Square's Cash App even became a popular hip hop namecheck. If no one's saying "Messenger me," is anyone going to say "Novi me"?
The crypto competition
Just as merchants have a number of payment processing options, consumers have a range of options for sending money. Remittances have historically been expensive, but World Bank data shows the cost of sending money out of the U.S. falling steadily over the past decade.
There is no mainstream crypto-based product for sending money overseas, at least in the U.S., but there are a number of consumer payment options with more on the way, many using technology to reduce costs.
If individuals want a crypto wallet, there are offerings from Coinbase and others that convert fiat to crypto and back and support a range of different cryptocurrencies and stablecoins. Some of these wallets or other services are used to send remittances internationally.
Guatemala's neighbor El Salvador, for example, offers a Chivo wallet from crypto firm Bitso that is designed to enable bitcoin transfers to and from the U.S. El Salvador is attempting to adopt bitcoin as legal tender, in part to reduce remittance costs.
"There are many better ways to transfer money or crypto than Facebook — Coinbase for one, so if as a user I know Coinbase is the custodian, I'm just going to use Coinbase," said Melody Brue, principal analyst at Moor Insights & Strategy.
The Novi wallet will go without Diem for now — even though that was a major reason for its existence at the outset. And that makes the questions around the future of the Diem stablecoin more urgent.
Diem was once known as Libra, and the Novi wallet was originally called Calibra. Though originally conceived by Facebook, Diem is now run by a nonprofit which has a number of companies involved, Facebook among them.
Now, Diem is waiting for regulatory approval to launch in the U.S. It reportedly has switched from seeking a license in Switzerland to moving operations to the U.S., and partnered with crypto-focused bank Silvergate to launch a dollar-backed token. But the regulatory path for any stablecoin, let alone Diem with its history, is unclear.
Lawmakers summoned Marcus to testify before Congress about Libra in 2019. On Tuesday, five Democratic senators, including Banking Committee Chairman Sherrod Brown, called on Facebook to shut down Novi and "not bring Diem to market," noting that Facebook committed to not launch a digital currency without regulatory approval.
"Despite these assurances, Facebook is once again pursuing digital currency plans on an aggressive timeline and has already launched a pilot for a payments infrastructure network, though these plans are incompatible with the actual financial regulatory landscape — not only for Diem specifically, but also for stablecoins in general," they wrote.
Regulators have concerns, too. The Federal Reserve is expected to release a much anticipated report on stablecoins, which financial officials increasingly view as a risk to the stability of the financial system: If investors start questioning the reserves behind a coin, that could prompt a run on that coin or stablecoins in general, forcing a sell-off of reserve assets which could in turn jeopardize the broader markets.
Facebook says it still supports Diem. However, since Facebook is now only one of a group of companies backing the project, it's less clear what the relationship between Novi and Diem really is and why it matters.
"I do want to be clear that our support for Diem hasn't changed and we intend to launch Novi with Diem once it receives regulatory approval and goes live. We care about interoperability and we want to do it right," Marcus said in a tweet.